To illustrate the problem, it might be useful to compare union overhead costs with those of nonprofits. There has been considerable research on charities and their spending on overhead and administration costs versus program costs.

The needs of charities for overhead and administrative support is a subject of some controversy, but a review of the literature indicates that a reasonably well-run nonprofit should be able to dedicate close to two-thirds of its spending to its core programs. Under the "Standards for Charity Accountability" published by the Better Business Bureau Wise Giving Alliance, program service expenses should make up 65 percent of total expenses.[72] The Combined Federal Campaign, the federal government's workplace charitable donation program, deems a charity ineligible if its administration, fundraising and overhead costs are persistently above 25 percent of revenue.[73] In an August 2005 statement, in which it urged donors to make allowance for charities' administrative and overhead costs, the Center for Philanthropy at Indiana University asserted, "[O]verhead costs can reasonably be 10 percent, or 20 percent or sometimes even 35 percent of an organization's budget, depending on the organization's work and its size."[74] With representation making up less than half of expenditures, it is not clear that any of the unions we reviewed would have met these standards.

If anything, that standard should probably be higher for unions than for other charities, because unions, unlike most other nonprofits, do not have to solicit funds voluntarily. Fundraising is a major factor in most nonprofits' overhead costs, but because of the availability of agency fees in most states, including Michigan, unions can draw revenue without the difficult work of identifying potential donors or making appeals to them — at least not in the manner required of most nonprofits. Because they are largely relieved of the burdens and uncertainties of fundraising, unions should be free to put more of their resources into representation.

In fact, to the extent that unions engage in "fundraising," the costs are inevitably treated as representation or "program." Unions secure dues revenues by organizing workers in new bargaining units and then negotiating collective bargaining agreements that include agency fee clauses. Union organizing drives are considered part of representation under the current LM-2 rules, and negotiating collective bargaining agreements is an essential part of the representation process.

[73] 5 CFR 950.203. The regulations refer to entries on a charity’s IRS Form 990, which include internal governance (referred to as “administrative” costs in the LM-2 rules) and general office/overhead costs as part of the “administrative and fundraising” expenses. These must be kept under 25 percent of revenue for a nonprofit to be eligible for the Combined Federal Campaign. For this reason, it is doubtful that any of the unions we reviewed would meet the CFC’s rules, although we cannot be certain. Unions generally file a copy of their LM-2 reports in lieu of the standard IRS form 990.

[74] The Center on Philanthropy at Indiana University, Statement about Nonprofit Overhead Costs, released August 2005. It should be noted that the Center on Philanthropy has advised donors to allow nonprofits to operate with more overhead, in order to assure that they have sufficient facilities and administrative support.